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Water Rate Cost-of-Service Study Section 2. Introduction HF&H Consultants, LLC | July 8, 2025 | Page 13 of 53 Section 2. Introduction STUDY PURPOSE The purpose of this study is to conduct a cost-of-service analysis that will determine rates that proportionally recover the cost of providing the City’s water service. Toward that end, the cost-of-service analysis determines how much revenue should be generated by each component of the rate structure so that rate payers within each customer class are charged for their proportionate share of the cost of providing service on a parcel basis. The cost-of- service analysis is tailored specifically to the City’s customer classes and the rate structures that are appropriate for each class. STUDY PROCESS In 2024, the City requested HF&H Consultants (HF&H) to perform a cost-of-service study to set water rates for FY 2025-26 through FY 2027-28. A ten-year analysis is provided to support for long-term planning. The primary goal of this study is to ensure that rates continue to reflect the current cost of providing water service. A comprehensive rate study comprises three steps: 1) revenue requirement projections; 2) cost-of-service analysis; and 3) rate design. Revenue requirement projections identify how much revenue is needed from rates. The cost-of-service analysis determines how much of the revenue should come from the fixed and variable charges. This step also confirms the proportionate amount to be paid by each customer. The final step, rate design, establishes the structure of the fixed service charges and the variable volumetric charges for each customer. The cost-of-service analysis was conducted following industry practices promulgated by the American Water Works Association.9 At the outset of the analysis, the types of customer classes were reviewed, as were the types of rate structures that are appropriate to the City’s customer class. REPORT ORGANIZATION The report is divided into the following sections: Revenue Requirements, Cost-of-Service Analysis, Rate Design, and Customer Bill Impacts. A Glossary of technical terms and acronyms is provided following the Table of Contents. Additional detail pertaining to the 10-year rate study can be found in Appendix A. 9 Principles of Water Rates, Fees, and Charges. American Water Works Association Manual M1. 2017. ATTY/RESO.0109/CC RESO WATER RATES - EXHIBIT A REV: 11-05-25 MI